(Reuters) — JPMorgan Chase & Co. will pay a $1.7 billion penalty to settle charges by U.S. federal authorities that the bank failed to report suspicious activity involving Bernard Madoff's Ponzi scheme.

As part of the deal, which describes numerous suspicious interactions during the bank's two-decade relationship with Mr. Madoff, JPMorgan is admitting it violated laws requiring it to monitor customer activity for money laundering in the case, authorities said on Tuesday.

The deal includes a two-year deferred prosecution agreement and settles outstanding probes by two bank regulators into failures in JPMorgan's anti-money laundering policies. The bank also agreed to improve its controls.

Shares of JPMorgan were down 1.2% at $58.29 in morning trading.

"We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time," JPMorgan spokesman Joe Evangelisti said in an email. "We filed a Suspicious Activity Report (SAR) in the U.K. in late October 2008, but not in the U.S."

He added: "We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme."

As part of the deal, the bank agreed not to apply for a tax deduction or tax credit for the $1.7 billion payment. The $1.7 billion will go to the victims of Madoff's fraud, according to Tuesday's announcement.

U.S. bank regulators in Washington are expected to levy additional fines against JPMorgan. Bank regulators will appear at a press conference scheduled for 1:15pm (1815 GMT).

JPMorgan is admitting it had failed to raise the alarm about Madoff's activities to a bank regulator, even though bankers in more than one area of its operations had identified inconsistencies in Madoff's behavior and his fund's returns.

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Mr. Madoff, through his Bernard L. Madoff Investment Securities L.L.C. hedge fund operation, was revealed in December 2008 to be the operator of a massive Ponzi scheme. Convicted in 2009 of defrauding thousands of investors, he is serving a 150-year prison sentence.

Mr. Madoff's is the largest known Ponzi scheme in history. He kept an account at JPMorgan Chase, or banks it had bought, from 1986 until his arrest in December 2008, according to a statement of facts that the bank agreed to for public disclosure.

The account at the bank received deposits and transfers of about $150 billion, almost exclusively from investors in Madoff Securities, yet the money was not used to buy securities as Mr. Madoff had promised, according to the statement.

The balance in the account reached $5.6 billion in August 2008 but was down to $234 million when Mr. Madoff was arrested four months later.

At various times between the late 1990s and 2008, employees of various divisions of the bank "raised questions" about Madoff Securities and the validity of its investment returns. Yet "at no time during this period" did they bring their concerns to U.S. anti-money laundering employees who were responsible for monitoring the bank's relationships with its clients, according to the statement of facts.

The bank did not file any suspicious activity reports on Madoff Securities in the United States until after Mr. Madoff's arrest.

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During the 1990s, according to the statement, Mr. Madoff routinely made "round-trip" transactions between an account at JPMorgan held by one of the bank's private banking clients and an account Mr. Madoff himself held at another unidentified bank. Using the unnamed client's account, Mr. Madoff moved money between the two banks daily and took advantage of the normal delays in the check-clearing process to make it seem as though both accounts had more money than they did.

JPMorgan paid interest on the inflated amount in its private banking client's account and continued dealing with Mr. Madoff even after the other bank identified the scheme, closed his account and notified JPMorgan, according to the statement.

In 1994, an employee of JPMorgan's private bank said in a memo that "the daily cost associated" with Mr. Madoff's withdrawals was "outrageous" and it was clear to JPMorgan that Mr. Madoff was earning interest on uncleared funds. But the memo said when the employee tried to notify JPMorgan's private banking client about the scheme, the client responded: "If Bernie is using the float, it is fine with me; he makes a lot of money for my account."